The price of energy is on the rise. But it isn’t a normal commodity bull market. It’s always risky to say “this time is different” when dealing with financial markets. But this time IS different. At least, for energy commodities.
Why is it different?
Because we have never been in a state of global recovery from a global pandemic health crisis in a world where 84% of all of our energy needs are driven by fossil fuels and all of our major industries are highly energy intensive.
Sure, you can point to the Spanish Flu of 1918-1920 – which left at least 50 million dead worldwide – as a comparable crisis. But it simply isn’t. That was worse. Far worse. And it was worse precisely because we lacked our current capacity for technology-augmented problem solving. And, of course, we did. What else is progress for?
But it was also different for other reasons. Back then, the world wasn’t nearly as dependent on the energy industry. And the energy industry wasn’t nearly as dependent on the world. As a result, this time around, the roller coaster has been more dramatic for companies making their living by providing for our energy needs.
There was no place worse to have your money in March – June 2020 than small cap energy stocks. However, as fate would have it, there may be no place better to have your money than small cap energy stocks a year later.
That has enormous opportunity implications for stocks like SM Energy Co (NYSE:SM), PDC Energy Inc (NASDAQ:PDCE), Viking Energy Group Inc (OTCMKTS:VKIN), Callon Petroleum Company (NYSE:CPE), Southwestern Energy Company (NYSE:SWN), and PBF Energy Inc (NYSE:PBF), a few of which we will discuss more thoroughly below.
PBF Energy Inc (NYSE:PBF) bills itself as one of the largest independent refiners in North America, operating, through its subsidiaries, oil refineries and related facilities in California, Delaware, Louisiana, New Jersey and Ohio.
PBF Energy Inc. also currently indirectly owns the general partner and approximately 48% of the limited partnership interest of PBF Logistics LP (NYSE:PBFX).
PBF Energy Inc (NYSE:PBF) recently reported first quarter 2021 income from operations of $57.7 million as compared to loss from operations of $1,366.8 million for the first quarter of 2020. Excluding special items, first quarter 2021 loss from operations was $317.8 million as compared to loss from operations of $134.0 million for the first quarter of 2020. PBF Energy’s financial results reflect the consolidation of PBF Logistics LP (NYSE: PBFX), a master limited partnership of which PBF Energy indirectly owns the general partner and approximately 48% of the limited partner interests as of quarter-end.
Tom Nimbley, PBF Energy’s Chairman and CEO, said, “PBF’s first quarter results reflect the continuing challenges of lower demand brought on by the pandemic. Our refineries operated well and at rates which mirrored demand.” Mr. Nimbley continued, “We did see sequential improvement during the quarter. We ran higher in March than we did in January which reflects more favorable market conditions as the progressive vaccine rollout lead to improving demand. However, even with rising demand, the independent refining sector is facing unsustainable headwinds as a result of escalating compliance costs under the RFS program. If the program is not fixed, it will likely result in a reshaping of the U.S. refining industry and a greater reliance on foreign energy.”
While this is a clear factor, it has been incorporated into a trading tape characterized by a pretty dominant offer, which hasn’t been the type of action PBF shareholders really want to see. In total, over the past five days, shares of the stock have dropped by roughly -10% on above average trading volume. All in all, not a particularly friendly tape, but one that may ultimately present some new opportunities.
PBF Energy Inc (NYSE:PBF) generated sales of $4.9B, according to information released in the company’s most recent quarterly financial report. That adds up to a sequential quarter-over-quarter growth rate of 34.7% on the top line. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($1.5B against $3.4B, respectively).
Viking Energy Group Inc (OTCMKTS:VKIN) bills itself as an independent exploration and production company focused on acquiring, enhancing, and developing oil and natural gas properties in the Gulf Coast and Mid-Continent regions.
It has assets in Texas, Louisiana, Mississippi, and Kansas. It is also currently the majority-owned subsidiary of Camber Energy Inc (NYSEAMERICAN:CEI), and a merger agreement is in the works that could increase the value of both companies through geographic and operational synergies.
Viking Energy Group Inc (OTCMKTS:VKIN) recently posted sturdy results for Q1, including revenues of nearly $10.5 million and an adjusted EBITDA of $4.63 million.
James Doris, President and Chief Executive Officer of both Camber and Viking, commented, “We are pleased with Viking’s Q1 results, especially following the unprecedented conditions experienced in 2020. We are extremely encouraged with the foundation we have established, and are intensely focused on pursuing growth opportunities.”
Importantly, the company was able to drive nearly 20% sequential quarterly topline growth ahead of any clear sense of full economic “reopening”, when analysts expect energy demand to grow significantly.
VKIN shares have pulled back to test potentially important support, which was last tested in 2015 and early 2016, leading to significant upside over subsequent quarters. As the company continues to build out its production base, and as the cash value of that output increases (as oil rallies), the stock might be seen as particularly undervalued given the fact that the crowd doesn’t seem to have found it over recent months.
Callon Petroleum Company (NYSE:CPE) is a good example of a smaller cap player in the energy sector that has growing operations. Like many stocks that fit this description, it was teetering on the verge of extinction following the pandemic lockdown crash a year ago. However, the stock has come roaring back, up 600% in the past six months but now nicely consolidating on the charts under the key $40 level.
The company bills itself as an independent oil and natural gas company focused on the acquisition, exploration, and development of high-quality assets in the leading oil plays of South and West Texas.
Callon Petroleum Company (NYSE:CPE) recently reported results of operations for the three months and full-year ended December 31, 2020, including full-year 2020 production of 101.6 MBoe/d (63% oil), an increase of 146% over 2019 volumes, year-end proved reserves of 475.9 MMBoe (61% oil), and net cash provided by operating activities of $559.8 million and adjusted free cash flow of $10.7 million, including net cash provided by operating activities of $368.1 million and $122.6 million of adjusted free cash flow generation over the last three quarters.
Joe Gatto, President and Chief Executive Officer commented, “In a year marked by extraordinary volatility in commodity prices and workplace challenges created by the COVID-19 pandemic, our newly integrated team executed flawlessly on a revamped set of operational and financial initiatives that ultimately delivered over $120 million of adjusted free cash flow since the beginning of the second quarter, dramatically improving our liquidity and absolute debt position. Importantly, these accomplishments were complemented by significant achievements related to employee safety and environmental emissions.”
And the stock has been acting well over recent days, up something like 5% in that time. Callon Petroleum Company (NYSE:CPE) generated sales of $359.9M, according to information released in the company’s most recent quarterly financial report. That adds up to a sequential quarter-over-quarter growth rate of 21.6% on the top line. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($24.4M against $672M, respectively).